Trade Between Symmetric countries, Heterogeneous Firms and the Skill Wage Premium

This paper examines the effects of trade liberalisation between symmetric countries on the skill wage premium. I use a model of monopolistic compe-tition with heterogeneous firms and two factors of production: skilled and unskilled labour. I introduce a correlation between productivity and skill in-tensity in the production process, which generates the empirically observed link between firm size, export status, wages and skill intensity. The entry and exit of firms following trade liberalisation has non-trivial effects on the demand for both types of labour, and therefore on their wages. I show that the impact of trade liberalisation on the skill wage premium depends on the type of trade costs considered, and on their initial size. A decrease in the fixed costs of trade has a potentially non-monotonic effect: it increases the skill premium in a world where the costs of international trade are high, but reduces it if trade costs are already low. On the other hand, a drop in the variable trade costs yields an unambiguous increase in the skill wage pre-mium